For years, pharmaceutical executives have insisted that drug prices are out of their hands. Government red tape, research costs, and reimbursement rules are all offered as explanations for why Americans pay more at the pharmacy counter than anyone else in the developed world.
It’s a tidy narrative. It’s also only half-true—pharma could easily drop its prices. But government has ensured that it has little reason to do so.
In a functioning market, companies charge what the market will bear. Those prices typically lower over time due to innovation, competition, and other factors. In only a few industries has the opposite happened—housing, higher education, and health care—all industries where incentives are skewed by government policies.
In the pharmaceutical industry, many factors create market disincentives. For example, U.S. taxpayers contribute roughly $17 billion each year to early-stage research and clinical studies, yet companies still price their products as if every cost rests solely on their own books. In most industries, a subsidy of that size would reduce the final price of a product. In pharmaceuticals, it has done the opposite.
Then there’s the government-guaranteed demand. Schools and the military require routine vaccinations, while federal insurance programs cover millions of prescriptions. These are not competitive markets. They are compelled markets where suppliers face little risk of losing large blocks of customers.
Whenever demand is guaranteed by federal or state policy, the incentive to price competitively weakens. A market that cannot walk away is a market that pays more.
Finally, we have patent abuse, where pharmaceutical companies create virtual monopolies by extending patents for critical and life-saving drugs again and again (and again), far beyond reason and beyond what many patients can afford.
Most industries do not enjoy this combination of subsidized research and guaranteed large scale buyers. A restaurant chain cannot rely on federal dollars to cover its early expansion. A tech startup cannot demand that public schools purchase its software. An airline cannot treat government agencies as automatic customers who have no alternative suppliers.
They all compete in markets where price is constrained by consumer choice and competitive pressure.
The irony is that pharma companies are behaving exactly as economic theory predicts. Again, students complain about high college prices—but they keep going up because of government loan, scholarship, and other policies that bring in billions as long as students can be convinced to sign the dotted line.
The same is true in housing, where well-intentioned government homeownership goals have created poor incentives for lenders and buyers alike (see the 2007 financial crash for an example of what happens when those incentive-created bubbles eventually pop).
The problem is not that companies follow incentives. The problem is that the incentives in the pharma market are distorted by public policy choices that tilt the field in one direction.
The lesson for policymakers and the public is straightforward. If we want a drug market that behaves like a market, we must design one. That means aligning research incentives with affordability and rethinking mandates that guarantee revenue without requiring accountability.
A firm’s first obligation is to its owners. If the structure of a market allows it to raise prices, reduce competition or shield revenue, the firm is expected to pursue those advantages.
And there is nothing inherently wrong with companies pursuing profit. But there is something wrong with a system that shields them from the competitive forces that keep other industries honest.
When companies say they can’t lower prices, it usually means that they simply don’t want to. But prices are choices made by all market players—such as consumers, manufacturers, and government regulators.
The sooner we acknowledge that prices are not set in stone, the sooner Americans can stop footing the bill for a pharmaceutical system that pretends otherwise.
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